The Securities and Exchange Board of India (SEBI) is continuously working on a new initiative that will implement instant trade settlement in the Indian stock market which is at T+0. This will be made possible through the Unified Payments Interface (UPI), online depositories, and technology stack.
It means that trades would be settled immediately, rather than the current T+1 settlement cycle, which means that trades are settled one day after the trade date or within 24 hours of the actual transaction.
SEBI’s Chairperson Madhabi Puri Buch aims to have real-time settlements of trades at stock markets. She states: “Certainly, one of the things we think is not very far off is the instantaneous settlement on the stock exchange. We are currently working on that. We think that the natural next step is instantaneous settlement. Will it be completed by this financial year? Not sure, could be. But it may spill over to next year as well.”
The T+1 settlement cycle was announced recently in January 2023, marking a move from the previous T+2 settlement cycle. It will be effective from October 1, 2023. This trade cycle improves efficiency and simplifies transactions for the stock market.
What Are the Benefits of the New Instant Trade Settlement?
Instant trade settlement would have a number of benefits for investors and market participants:
Reduced risk for investors: Currently, if an investor sells shares on a given day, they will not receive the proceeds from the sale until the following day. This means that if the market falls sharply overnight, the investor could lose money on the sale. With instant trade settlement, investors would receive the proceeds from their sales immediately, which would reduce their risk exposure.
Nirav Karkera, Head of Research at Fisdom told Business Standard: “Such introduction of instant settlement will have a direct, positive impact on the cash segment where volumes can be expected to pick as investments move across stocks without delay.”
“Right now, investors need to wait for settlement to buy another share in the cash segment or rely on limits offered by the stockbroker. While the first case renders the entire investment experience as inefficient, the second involves a lot of subjectivity on the stockbrokers’ end.” Such developments can also be expected to help stockbrokers, as the degree of risk on account of defaults on margins offered to clients will drop significantly,” he added.
Increased liquidity in the market: This is because investors would be more likely to trade if they knew that they would receive the proceeds from their sales immediately. Increased liquidity would make the market more efficient and would benefit all investors.
Avinash Gorakshkar, Head of Research at Profitmart Securities told Mint: “SEBI’s move towards instant settlement is expected to up the pace of new equity issuances, debt issuances, approvals for mutual fund schemes. The move is expected to increase volume in cash segment as one would be able to move from one stock to another on the same date instead of waiting for settlement of one’s trade after one day or two days (as applicable on the scrip).”
Reduced risk of settlement failures: Currently, if a settlement fails, it can have a ripple effect throughout the market, leading to losses for investors and market participants. With instant trade settlement, the risk of settlement failures would be significantly reduced.
Reduced costs for market participants: Currently, there are a number of fees associated with settling trades, such as clearing and settlement fees. With instant trade settlement, these fees would be reduced, which would benefit investors and market participants alike.
In conclusion, instant trade settlement can be a promising development that could have a number of benefits for the Indian stock market. However, there are a number of challenges that need to be addressed before it can be implemented. If these challenges can be overcome, instant trade settlement could make the Indian stock market more efficient, accessible, and secure.
Categories: Trends
Source: HIS Education